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Dick Smith Is the Greatest Private Equity Heist of All Time
- tsujamin 11y agoGood mate of mine works there. Been telling me dodgy shit for ages now. Both had a good laugh today about it :P (except for the whole loosing his job thing)
- danieltillett 11y agoThis story might be a little too Australian to appeal to the broad HN community, but what happened to dick smith was completely criminal. Defiantly worth a read.
- jhbadger 11y agoIn the 1980s, at their peak, they had a few stores in the US West Coast. They were better than the native equivalent here (Radio Shack) and I never understood why they didn't make it here.
- kitd 11y agoIn the UK, DSE became famous for selling dirt cheap consumer electronics on garage forecourts. But I'm not aware of any actual stores (I may be wrong).
- Maxious 11y agoIf you're not Australian or especially if you are, this is an fascinating talk by Dick Smith (including quite a bit about his round the world helicopter trips!) https://www.youtube.com/watch?v=V1eivQNtulE https://www.youtube.com/watch?v=V1eivQNtulE
- cube00 11y agoHis energy when he was starting out is amazing: http://www.9jumpin.com.au/show/60minutes/videos/1039629576001/ http://www.9jumpin.com.au/show/60minutes/videos/103962957600...
- neurotech1 11y agoIts worth noting that Dick Smith, the founder/adventurer/pilot, has zero to do with how Dick Smith Holdings is ran as a company.
- Namidairo 11y agoDick Smith Foods however, I think he might still have a hand in. One of their more memorable products, being the Dickheads... https://en.wikipedia.org/wiki/Dickheads https://en.wikipedia.org/wiki/Dickheads
- caf 11y agoThey never dared move into the cheese market, though.
- neurotech1 11y agoDick Smith Foods[0] is a separate company that he is still involved in its management. [0] https://en.wikipedia.org/wiki/Dick_Smith_Foods https://en.wikipedia.org/wiki/Dick_Smith_Foods
- vincentleeuwen 11y agoI live on the other side of the globe, but found it a very interesting read!
- Negitivefrags 11y agoIt's worth noting that Dick Smith is going into receivership now. This was an article posted today in my local paper. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11569422 http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&o...
- nzgrover 11y agoAt the beginning of the month they ran an article basically saying this was about to go down: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11556861 http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&o...
- anon4this1 11y agohttp://www.anchoragecapital.com.au/team/ http://www.anchoragecapital.com.au/team/ Phil Cave was the anchorage capital guy who they made the chair of dick smith, and who must've led this thing. "Phil was appointed a Member of the Order of Australia in 2007 for services to the community, particularly support services to children and young adults with disabilities, and to business as a company director. He is currently Chairman of the not-for-profit organisations Ability First Australia and Excelsia College (Formerly Wesley Institute)." this guy needs at minimum criminal charges, preferably a fucking bullet.
- pjc50 11y agoWhy criminal charges? He wasn't defrauding members of the public, all the relevant information is in the balance sheets (as we can see in this blog!) and the investors who lost out were big equity market players who really should have known better. The extraordinary thing is buying a business with $371m of inventory for $115m.
- sumedh 11y ago> The extraordinary thing is buying a business with $371m of inventory for $115m. To be fair the buyer can say that the products are obsolete so the inventory cannot be valued at $371m.
- petecox 11y agoI've bought several things from Dick in the past 12 months, mainly click-and-collect, where they're competitive with other online retailers when specials are posted via ozbargain. Or a wireless mouse that's cheaper than the supermarket aisle. But the stock in store? they were recently selling HDMI cables for about $12 that had been discounted from $55. Having low turnover stock sit on the shelves that is vastly inflated in price is what got them in this mess. The real worth of the goods was probably closer to $115m, but treble the valuation based on insane highway-robbery retail markups.
- caf 11y agoIt sounds like there wasn't sufficient information provided at the time of the public offering to do this analysis. The article author writes in the comments: We were talking about this yesterday. The problem is that they only have to provide you with a balance sheet at one point in time. We knew it was fishy at the time of the float but there was no way of working all of this out until you can see a time series (and, importantly, they had to give you the old balance sheet as part of the business combinations note). The $170m of inventory in the prospectus was roughly two months sales, about the same as JBH. Looks low but you wouldn’t think only half of what is usually required. The pre-float article is here: https://foragerfunds.com/bristlemouth/bristlemouthdick-smith-takes-bath-comes-out-nice-and-clean/ https://foragerfunds.com/bristlemouth/bristlemouthdick-smith...
- markdown 11y agoWhy is this shit still legal? I mean, for basic goods, there are laws against false advertising and selling defective goods (lemon laws in the US). But at this level, these bastards can put a fresh coat of paint on a rust bucket and sell it as a Ferrari... and get away with it? Infuriating. On a personal level... When I was growing up, it was goldmine of electronic components, DIY kits, etc. I visited a Dick Smith a few years ago and it was terribly disappointing... computers, televisions, phones. The DIY stuff that was a makers dream was gone. I believe a parallel in the US is what happened to RadioShack.
- lmm 11y agoThere are laws about how you do accounting. They're not perfect. They can tweak their operations such that they can say "we made $40m in profit this year", and it's very hard to make that illegal. Investors need to go into the details rather than just assuming that whatever they did to make a profit is indefinitely sustainable.
- markdown 11y ago> Investors need to go into the details rather than just assuming that whatever they did to make a profit is indefinitely sustainable. If the institutional investors (experts in the field like Commonwealth Bank) couldn't smell a rat, mom and pop investors had no chance!
- yvdriess 11y agoThe interesting question is if this was intentional neglect, unintentional neglect or incompetence.
- lmm 11y agoMom and pop investors should not be buying single-name stocks. Leave that to the pros. (It would probably be beneficial for small investors for it to be illegal, but that would look like rigging things in favour of the big players, so it's politically impossible)
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- osullivj 11y agoWho bought into the float? I'm guessing institutional investors, like pension fund managers, bought many of the shares at $2.20. Serious questions should be asked of those guys too. They have a duty of care over people's pension funds, they're investment professionals, and they should be able to read the balance sheets and not get outsmarted by this Phil Cage fellow.
- cube00 11y agoAnyone and everyone, it was floated as an IPO to the ASX. http://www.theage.com.au/business/dick-smith-flat-after-underwhelming-debut-20131204-2yr2y.html http://www.theage.com.au/business/dick-smith-flat-after-unde...
- caf 11y agoOne of the comments to the article: Who were the fund manager bunnies that fell for all this? Perpetual, AXA, Commonwealth Bank and AMP. Well done guys! Now who can name the investment managers responsible so as we can all give them a wide berth?
- adaml_623 11y agoAnd the reply to that comment: > You ask who “fell” for it? I’d be more inclined to ask who was “In On It”
- osullivj 11y agoGood point. Which AU Investment Bank underwrote the float? IBs always let their friends in at a lower price so they can flip when trading starts. In this case it was float at 2.20, so they would have mates in at say 1.50. IB spreads the risk a little, and IB mates make a quick little earner...
- osullivj 11y ago"Goldman Sachs and Macquarie Capital were joint lead managers, joint bookrunners and underwriters to the Offer. Aquasia advised the Board in relation to the Offer and Minter Ellison was Dick Smith’s legal adviser." [1] So, the usual suspects... [1] http://dicksmithholdings.com.au/events/dick-smith-lists-on-asx/ http://dicksmithholdings.com.au/events/dick-smith-lists-on-a...
- twelvechairs 11y agoGoogle cache as the site is down: http://webcache.googleusercontent.com/search?q=cache:6ejGUtuY55oJ:https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/+&cd=1&hl=en&ct=clnk&gl=us http://webcache.googleusercontent.com/search?q=cache:6ejGUtu...
- roel_v 11y agoTalking about Dick Smith, when I was in Oz a few weeks ago I stayed in an Airbnb'd house that had 'Dick Smiths fun way into electronics' in a bookshelf. Apart from some funny 1980's anachronisms ('Moore's law will be irrelevant by the early 1990's because who needs that many transistors'), I loved it. I'm trying to learn some basic electronics and the descriptions of the circuits provide the right 'bridge' between 'this is Ohm's law' and 'here is a fully functional schematic'. So my question - is there a place I can get all 3 volumes? Or does anyone have pdfs of them?
- shasheene 11y agoYou may be interested in checking out this series of blog posts [1] (with a surprising cameo by Dick Smith himself in the comment section) [1] http://goughlui.com/2014/11/09/tech-flashback-dick-smiths-fun-way-into-electronics-vol-1/ http://goughlui.com/2014/11/09/tech-flashback-dick-smiths-fu...
- roel_v 11y agoYeah I found those when I was googling for it, but since the site mentions 'still in copyright' several times, I didn't even bother emailing him for pdfs. The site is nice but lacks the actual content.
- julianz 11y agoIf you search on trademe.co.nz (biggest auction site in NZ) in the book section there are several copies of all the books available cheap. I was an 80's kid and the Fun Way books and associated kits were definitely one of the ways I got into electronics and related tech stuff. It's a real shame what's happened to Dick Smith but it's been easy to see it coming for a very long time.
- roel_v 11y agoAh yes, I hadn't thought of that - thanks!
- rhyselsmore 11y ago
- Vintila 11y agoSomewhat interesting: http://www.anchoragecapital.com.au/case-study-dick-smith http://www.anchoragecapital.com.au/case-study-dick-smith Their case study on the acquisition.
- SyneRyder 11y agoA few interesting points in there. Anchorage apparently sold off their entire investment by September 2014, near their peak price, though the shares traded around the same numbers for another year[1]. They describe Dick Smith Electronics as the largest retailer in Australia by "number of stores" - which should maybe have been a warning sign if they had more stores but less revenue. Anchorage also mention Dick Smith taking over operating the electronics departments of David Jones department stores in October 2013 - but just six months later, David Jones was sold to Woolworths South Africa and taken private[2]. Also worth noting the "Hong Kong sourcing office for private label products". Over-investment in private label products seems to have sunk them: few people want a Dick Smith TV over a Samsung, Sony or LG. [1] https://au.finance.yahoo.com/q/bc?s=DSH.AX&t=2y&l=on&z=l&q=l&c= https://au.finance.yahoo.com/q/bc?s=DSH.AX&t=2y&l=on&z=l&q=l... [2] http://www.news.com.au/finance/business/david-jones-agrees-to-be-bought-by-south-africas-woolworths/story-fnkgdftz-1226878583679 http://www.news.com.au/finance/business/david-jones-agrees-t...
- _kyran 11y agoThis press release(http://dicksmithholdings.com.au/wp-content/uploads/2016/01/Press-Release-Ferrier-Hodgson-Dick-Smith-Holdings-January-2016.pdf http://dicksmithholdings.com.au/wp-content/uploads/2016/01/P...) from today says it all: Dick Smith Holdings Ltd, (‘DSH’) one of Australia’s largest electrical retailers, was placed in receivership today following the appointment of Voluntary Administrators. Receiver Mr James Stewart said it was too early to clearly identify the primary causes of the company’s current financial position and the reasons for its decline other than saying the business had become cash constrained in recent times.
- cant_kant 11y ago"After a period of exclusivity, in November 2012 Anchorage acquired the business for $20 million. " "At the time of listing the business had a market capitalisation of $520 million. Anchorage retained a 20% stake in the listed entity following the IPO, which was subsequently sold down in September 2014. " Nice IRR.
- femto113 11y agoThe half-billion dollar number seems overstated, that was a theoretical market cap and doesn't imply that much money really changed hands. If I'm reading this correctly Anchorage's actual takeaway was "only" about $100MM, since they retained 20% after the float, they then sold this off in the market. For those assuming Woolworths was duped I note they got a comparable amount. This suggests they gave up roughly 50% of the extractable value in return for not having to do any of the dirty work. The big losers are anyone who bought the float at list price and still hold it, and of course the taxpayers who are on the hook for "employee entitlements".
- chillydawg 11y agoThat 20% was what was left after they sold 80% to the market, though. The article mentions the fund acquired 100% of the equity in Dick Smith from woolies so at float time, Woolies had nothing to do with it. I think Woolies got a pretty decent price and people buying shares at IPO need to do their homework.
- beedogs 11y agoHooray for private equity, the vultures of capitalism.
- eru 11y agoVultures funds are pretty important. Just as much as shorting.
- xcasex 11y agoThis, to me, is somewhat funny in the "that train is going to hit that car.." sense. whenever there's an exploit used by non state actors in an adversarial sense, there's goverment pressure to cyber this, cyber that, banhammer down, on the technology sector. But several times a year we get to read about predatory behaviour by financial institutions. i'd even venture to say borderline illegal considering the presedences. i digress, but there's simply low enough of a risk of the goverment getting involved that this type of crime is not only "worth it" but also shows how deeply embedded the finance sector is in the pockets of politicians the world over.
- arethuza 11y agoWhat was "borderline illegal" about it - from what I can see they used a few tricks that are fairly standard in the private equity world and that any "sophisticated" buyers of the stock should have been able to spot if they were any good at their jobs. Of course, the PE company comes across as sharks - but all PE companies are sharks - that's what they do!
- yvdriess 11y agoYou are being a bit hard on sharks here, they provide a valuable service to the ecosystem.
- arethuza 11y agoPerhaps you could perhaps argue that PE companies play the same role in the commercial world as scavengers do in ecosystems - rip up the dead or nearly dead and try and extract value from it. Not something that I could do, or even admire, but capitalism is much about failure as it is about success.
- fireflash38 11y agoIsn't that the problem here? It seems like Dick Smith was already well on the way to failure, but Anchorage comes in and props it up like it's succeeding enough to cash in on a stock offering.
- puppetmaster3 11y agoHave you all seen the doc: http://thewallstreetconspiracy.com http://thewallstreetconspiracy.com It's related to Google Voice and a startup that went IPO.
- nraynaud 11y agoI can't stop thinking about Dick Smith getting into his helicopter, going back to Alaska and kick some butts there.
- rayiner 11y agoThere is another story here. Look at the inventory level at the time of sale: $371 million. In that time frame, they had about 1.2-1.3 billion in revenue. That puts their inventory-turnover ratio at around 3.2-3.5. Meanwhile, Best Buy, GameStop, hhgreg, operate at a turnover ratio approaching 5.5, and Amazon is at over 8.[1] So here is my alternative take on this: Woolworth's knew that retail consumer electronics is a dead business in the age of Amazon and Apple/Microsoft company stores. They knew that the $371 million of inventory was never going to sell at that price. Who wants to buy 6-9 month old consumer electronics? So they sold Dick Smith at a discount to: 1) get out of a dying business area; 2) have someone else take on the onerous task of liquidating whatever value could be extracted from the company. Now, as to the subsequent sale. It's not like prospective investors didn't see these transactions. It's not reasonable to assume that institutional investment professionals couldn't have figured out what it takes this blog post a couple of pages to explain. More likely, they were taking on a gamble: here was a leaner, meaner Dicks stripped of baggage that could make profits going forward. They lost that bet, but not because of anything the PE company did.[1] They lost that bet because Dick Smith immediately bloated itself up again with huge amounts of inventory, likely because the company simply wasn't structurally capable of operating as leanly as the market now demands. [1] http://marketrealist.com/2015/01/best-buy-attempts-optimize-inventory-levels http://marketrealist.com/2015/01/best-buy-attempts-optimize-.... [2] This does not appear to be a case where, e.g. the PE company loaded the target up with unsustainable debt.
- wheaties 11y agoThis. They took a gamble, probably with a very small portion of their total investment. If they were building a total market fund they may have had absolutely no choice but to buy some of the stock. That said, good job Woolworth.
- roymurdock 11y agoFrom the article: Remember the plant and equipment writedowns? That reduces the annual depreciation charge by $15m. Throw in a few onerous lease provisions and the like, totaling roughly $10m, and you can fairly easily turn a $7m 2013 profit into a $40m forecast 2014 profit. That allows Anchorage to confidently forecast a huge profit number and, on the back of this rosy forecast, the business is floated for a $520m market capitalisation, some 52 times the $10m they put in. The PE firm didn't do anything "wrong"...they simply charged (much) more than the company was worth off the back of unrealistic and borderline fudged profit forecasts. It's the buyers' fault for not conducting due diligence and calling bullshit on the price set by the PE firm. But at the end of the day $520m is peanuts compared to the size of institutional mutual and pension funds who need to find places to invest hundreds of billions in a multi trillion dollar market. I wouldn't be surprised if many small-mid PE firms were using financial bloat to their advantage - find small deals, strip and reorg, optimize profit to secure some unreasonably high valuation, but still small in the grand scheme of things, float the new org to huge institutional funds who are starving for new, diversified assets to add to their portfolio in the ZIRP era.
- lintiness 11y agowhen i graduated from college, everybody wanted to be investment bankers (glorified sales people for businesses). now, everybody wants to be a private equity analyst. the market's replete with firms engineering paydays rather than retooling businesses as investments (the old way), and the newb "desire" to enter the market is definitely a symptom of disease.
- chollida1 11y agoThe private equity playbook for buying a public company: 1. Find company with lots of cash on the books but trading very cheaply 2. Acquire company and use cash on books to fund it 3. Cut costs as deeply as you can and still have a company 4. (Optional) Combine it with anther firm to create "synergy" 5. Spin it back out for a profit Corel was a company that got eaten and spit out in this fashion by Vector Capital. It was purchased for about $120 million but it had $90 million of cash on its books, meaning the deal didn't require putting up alot of capital. After the deal was done, there was a large head count reduction, which for a technical company is the equivalent of a retailing dumping inventory and not restocking it. It was then merged with WinZip, WinDVD and a few other companies and then spun back out as a new company under the Corel name again. It turns out that this didn't work so well for Corel and Vector reacquired them in 2009 to try this all again. see: http://247wallst.com/banking-finance/2009/10/29/corel-strangest-go-private-ma-ipo-story-of-the-decade-crel-msft-adbe/ http://247wallst.com/banking-finance/2009/10/29/corel-strang...
- rayiner 11y agoCompanies with lots of cash on the books trade very cheaply because investors think they'll burn through it without producing additional revenues.
- trgn 11y agoOut of curiosity; what about apple, exxon and other of these juggernauts? Does cash depress stock price here? Or do they come out on the other end of the wormhole, where they have so much cash because they cannot conceivably put it to work profitably in their domain/industry?
- jonnathanson 11y agoWall Street has been on Apple's ass re: its cash holdings for years and years now. Until recently, by sheer force of its market growth, Apple has been able to shrug off these concerns. Not as easy to do these days.
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- amatix 11y agoEven more dodgy: Dick Smith was promoting gift cards through December with a "bonus 10% value"[1]. No problem -- except in receivership, gift cards rank as unsecured creditors and already aren't being honoured (even though the stores are still operating atm). Management must have known that the banks were days away from pulling the plug yet worked to sucker the public into giving them further credit... Never buy store gift cards for non-trivial amounts! [1] https://twitter.com/ForagerFunds/status/684196897343471616 https://twitter.com/ForagerFunds/status/684196897343471616 & https://twitter.com/ForagerFunds/status/684197213556191232 https://twitter.com/ForagerFunds/status/684197213556191232
- Someone1234 11y agoThat's a legit concern about Barnes & Noble right now. But with B&N not only gift cards, but their entire digital business (Nook). If anyone received a B&N gift card for christmas, my advice is to spend it soon, and spend it on physical goods -- not digital. Because when the hammer falls your digital "purchases" are not going to be protected.
- DannoHung 11y agoThanks for the warning. Going to make sure I liberate all my Nook ebooks tonight.
- hullo 11y agoBarnes & Noble is in no danger of going out of business. Even when Borders went kaput there was a long warning, and that was a very differently run kind of business (although eerily on point for this topic, as it was run into the ground by PE).
- Someone1234 11y agoIt lost money in four of the last five years. Ebook sales are declining, and they've closed stores. They've also been making a bunch of bad decisions, like investing massively into 3D printing which hasn't paid off, and doubling down on Nook again and again. Coloring books did pay off a little for them, I admit, but at this point it is more a question of "when" B&N will go bankrupt not "if."
- snake_plissken 11y agoWhile I get the whole buyer beware thing, as it's supposed to be consummate investment managers making the decisions, I can't shake the feeling that this whole thing is shady. Anchorage Capital used a bunch of accounting maneuvers to make the company look stronger than it was in actuality. It's even shadier if you agree with the position that Woolworths wanted out and was willing to take ~60% haircut on $300 million worth of inventory, because then it becomes kind of obvious what Anchorage was going to do all along. I am not sure what is more unsettling. That investment managers didn't realize they were buying a retail company with no inventory and cash flows generated by the liquidation of said inventory, or that a PE company sold what they knew was a stripped down company to the public?